Public Bill Committee

[Frank Cook in the Chair]

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003) - Clause 2

Personal allowances for those aged 65 and over

Question proposed [this day], That the clause stand part of the Bill.

Question again proposed.

Jane Kennedy: I welcome you to the Committee, Mr. Cook. I was on the point of making a final response to the hon. Member for Runnymede and Weybridge. He asked two detailed questions on the clawback for the higher amounts of personal allowances for individuals aged 65 and above, and at what points the higher amounts of personal allowances were taken away. He was also looking for a signpost to where the measures could be found.
The income limit for the taper for higher amounts of personal allowance for individuals aged 65 and above is subject to an annual statutory increase by indexation, as is provided by paragraph 57(1)(h) of the Income Tax Act 2007—hon. Members can see that I have the detail. For 2007-08, the limit is £20,900, as set in the Income Tax (Indexation) (No.2) Order 2006, and for 2008-09, the limit is £21,800.
On the hon. Gentleman’s second question, for 2008-09, the points at which the higher personal allowance for individuals is tapered away is £28,990 for individuals aged 65 to 74, and £29,290 for individuals aged 75 and over. If further details are admitted, I would be more than happy to return to the matter, and certainly to write to the Committee when it has had time to consider Hansard.

Question put and agreed to.

Clause 2 ordered to stand part of the Bill.

Schedule 1

Abolition of starting and savings rates and creation of starting rate for savings

Philip Hammond: I beg to move amendment No. 11, in schedule 1, page 98, leave out lines 6 to 8.

Frank Cook: With this it will be convenient to discuss amendment No. 12, in schedule 1, page 98, line 13, at end insert—
‘(6) The starting rate for savings is to be applied only on the making of a claim.’.

Philip Hammond: The schedule deals with the detailed implementation of clause 3, which we already discussed in the Committee of the whole House. I shall speak to the amendments separately, and to amendment No. 12 first, because it is the simpler of the two.
By tabling amendment No. 12, I seek clarification from the Government and ask them to make explicit what is implicit in the arrangements, namely, that the starting rate for savings will be available only on the basis of claim. In other words, savers will see tax deducted at source at 20 per cent., and will then have to claim back to recover the difference between the starting rate for savings and the basic rate that has been deducted.
Proposed new section 7 of the Income Tax Act 2007, titled, “The starting rate for savings”, will mainly benefit low income savers. I do not believe that anybody has a problem with the principle of the measure, but the concern is that many people who are intended to benefit from it will not routinely make income tax returns or be familiar with the process of making a claim for recovery of overpaid tax on form R40. Many people, even when they become aware of the process, may feel that it involves a lot of bureaucracy for what might be a relatively small amount. What assessment have the Government made of the situation with regard to the likely take-up of the starting rate for savings on the basis that a claim will have to be made? The amendment would include in the Bill a reference to the fact that the relief is available only on the basis of a claim, for the sake of clarification. What steps do the Government intend to take in order to increase awareness of the starting rate for savings and the process by which it has to be claimed? There will be some quite complex calculations to be done.
I have a note here from one of the major accountancy firms—an internal training note setting out examples of how the starting rate for savings will work for different groups of individuals. I will just give the Committee a flavour of some of the complexity. Example 6 is:
“Taxpayer aged 74, married, earned income £12,000, savings income £3,000. Earned income exceeds personal allowance by £2,970, so according to rules, no 10% band on savings income allowed. Therefore all taxed at 20%. So tax on pension income equals £594. Add tax on savings at 20% of £600. Total tax due: £1,194. But married couples’ allowance reduces tax bill by £653, so tax bill only £541. Therefore, this is likely to be a repayment case at year end as taxpayer would fail the R85 registration test for gross interest.”
Now we are not talking here about a multinational corporation. We are talking about a 74-year-old taxpayer, with an earned income of £12,000 and a savings income of £3,000—someone with quite modest affairs, unlikely to be professionally advised and likely to do his own tax return. I am sure the Minister will agree with me that, in the case of that particular taxpayer, it is quite likely that he would either fail to recognise that he is entitled to the relief, or at some point in that calculation, would simply give up and decide that life is too short and it is not worth bothering to pursue the claim.

John Penrose: Does my hon. Friend agree that, following his earlier comments about incentives to save, anything which is this complicated would make it virtually impossible for the man in the street to understand whether or not he was going to be better off with savings and inevitably reduce incentives to save and the rate of saving?

Philip Hammond: My hon. Friend is absolutely right. That is one of the great problems as the Government wrestle with the micro-tuning of the tax relief and support system. I suspect that we will see some more of this when we hear the Government’s intended response to the compensation proposals for the loss of the 10p rate. There tends to be a complex process around them, and it tends to become more and more difficult for individuals to identify whether or not they are eligible for reliefs and how they go about claiming them. It is that combination of complexity of calculation, the existing culture of low take-up and the very low absolute value of claims that often means that very few will actually benefit. That is why it seems to us on this side that this arrangement is unlikely significantly to mitigate the loss of the main 10p rate. Therefore, it will not be a major part of the package that the Government—we hear—are going to put together as a solution.

Jeremy Browne: Is it not illustrative of precisely the point he is making that the Government almost invariably budget for less than 100 per cent. take-up when they introduce measures of this type?

Philip Hammond: Indeed it is, and I was about to ask the Minister what take-up is budgeted for in the figures that have been put before the House, and on what basis the Treasury’s costing of this measure has been done. We know that we get different levels of take-up in different parts of the system. This measure is likely to be particularly important to elderly people. We know that pension credit take-up is low, so we know that we are dealing with a group of people who, typically, are disinclined to take up benefits or tax relief even when they are available to them. That is a very important point for the Committee to consider in thinking about how this measure will work in practice.
Amendment No. 11 seeks to leave out lines six to eight on page 120. This is very much a probing amendment. We are trying to understand what the Government are seeking to do. There are two questions arising from the deleted lines. Lines six to eight effectively replace subsection (2) of section 12 in the Income Tax Act 2007. The words in that Act are:
“(2) This is subject to—
Chapters 3 to 6 of Part 9 (which provide for some income of trustees to be charged at the dividend trust rate or at the trust rate),
section 504(3)(treatment of income of unauthorised unit trust), and
any other provisions of the Income Tax Acts (apart from sections 10 and 11) which provide for Income to be charged at different rates of income tax in some circumstances.”
The Bill before us today simply refers to “any provisions of the Income Tax Acts”, so deleting all reference to chapters three to six of part nine and section 504(3). It goes on to refer specifically to “an individual”, so clearly the intention is that the provision of a starting rate for savings is denied to trustees, and is available only to individuals.
I would therefore be grateful if the Minister would explain to the Committee why that decision has been taken, and what impact the exclusion of trustees will have on small trusts. Is there any reason in equity why trusts should not be entitled to the same relief that is available to individuals. Once again, this is a stealth tax on trusts. It has been slipped into the small print here without any fanfare or announcement, and I think that the Committee is entitled to an explanation from the Minister. After all, the income of trustees is eligible under the current regime—the pre-Finance Bill 2008 regime—for the savings rate, and is now not eligible for the starting rate for savings. That seems illogical and inequitable, so I would be grateful for the Minister’s comments on that.
The second part of the inserted subsection makes the starting rate of savings subject to any other provisions of the 2007 Act. I would just like to hear clearly from the Minister that this is not a denial of starting rate for savings in any other cases, or a protection of a more generous treatment. I am not expressing myself terribly well. It is unclear to me whether the words in this section are intended to deny privileged treatment to some individuals, or to protect an otherwise more privileged treatment. Where we see references to provisions elsewhere,
“which provide for income of an individual to be charged at different rates of income tax in some circumstances”,
the explanatory notes refer to the lower rate for dividends. Are there any other circumstances in which this provision will be disapplied in order to apply a provision elsewhere, in other statutes? In those cases, are we denying a more favourable treatment by denying the starting rate for savings; or are we protecting a treatment that is more favourable than the starting rate for savings? I hope that that is clear. Will the Minister tell us whether there are circumstances, other than dividends taxed at the dividend ordinary rate, in which the provision of this subsection bite?

Jane Kennedy: This schedule, together with schedule 3, removes the 10 per cent. starting rate on income tax for non-savings income, it abolishes the now unnecessary savings rate of 20 per cent.—I shall say in a moment why that is sensible—and it creates a new starting rate of 10 per cent. for savings income, which effectively reverts to the way it was. It also makes consequential amendments to other legislation affected by the changes.
For many years, savings income has been taxed at 10 per cent., 20 per cent. and 40 per cent. Before this year, the income tax system taxed non-savings income at 10 per cent., 22 per cent. and 40 per cent. The 40 per cent. band therefore applies to savings and non-savings income. A separate rate of 20 per cent. existed that applied only to savings. Since the new non-savings income tax rates are 20 per cent. and 40 per cent., the special savings rate is no longer necessary, as the 20 per cent. band applies also to savings income. However, as the 10 per cent. starting rate has been abolished, it is necessary to introduce a new provision to ensure that a 10 per cent. starting rate for savings income is available. That is the purpose of the changes that we are making.

Philip Hammond: Is the 20 per cent. rate that existed under the previous arrangement available to trustees?

Jane Kennedy: I will come to that in a moment. I have some information that will help, but it is a complex area and I want first to deal with the amendments. They are fair and raise sensible points about the complexity of the arrangements that people have to make when claiming tax rebates.

Stewart Hosie: I wish for a bit more clarity. The Minister said that the 10 per cent. rate would still be available for savings. However, if I understand it correctly, that is not simply up to the limit of £2,320. If the non-savings taxable income exceeds that starting rate limit, the 10 per cent. rate does not apply; it is taxed at 20 per cent. Am I correct?

Jane Kennedy: I am not sure that I entirely understand the question. There are a number of bands of income, and there are rules about which are selected first before the thresholds apply. It depends on whether it is earned income or savings income.

Stewart Hosie: That was savings.

Jane Kennedy: I appreciate that, but I am trying to answer the question. If it helps, he is correct.
The hon. Member for Runnymede and Weybridge tabled two amendments. He and I both recognise the importance of savings in providing people with independence throughout their lives. Savings also provide security should things go wrong, and comfort in retirement. The Government want more people to enjoy those benefits. About 3 million people, mostly those on low incomes, are eligible for the 10 per cent. rate on savings income. We maintained the savings rate in order to continue to reward saving; we also make available vehicles to encourage others to save, including individual savings accounts and the child trust fund.
I shall deal first with amendment No. 11. I wanted to hear what the hon. Gentleman had to say on both amendments, because it was difficult to understand their purpose. As I understand it, having heard him and read the amendments, amendment No. 11 would effectively remove a signpost to provisions that apply different rates of tax to certain types of income falling within the starting rate limit for savings, particularly dividend income, which is taxable at special rates. Where dividend income falls within the basic rate band, it is taxable at the 10 per cent. dividend ordinary rate, as I said earlier.
The only result of removing the signpost would be to create confusion and uncertainty about which rate of tax applies where there are special rates. It might also be seen as seeking to widen the availability of the 10 per cent. starting rate for savings beyond savings income, creating further uncertainty. Therefore, I see no benefit in the amendment.

Philip Hammond: Will the Financial Secretary give way?

Jane Kennedy: The hon. Gentleman asked me a number of detailed questions, but I will give way.

Philip Hammond: I understand what the Financial Secretary is saying about the lower dividend rate. She says that the amendment would remove a signpost and thereby reduce the clarity. If the signpost that I propose to remove said, “This does not apply where the lower dividend rate applies”, I would agree with her, but it does not. It says that it does not apply where individuals are to be
“charged at different rates of income tax in some circumstances.” 
Are there any circumstances other than the lower dividend rate in which that will not apply, and if so, what are they and what will be the impact on taxpayers in those circumstances?

Jane Kennedy: No new circumstances are being introduced as part of these changes, so no further people will be caught in the way that the hon. Gentleman appears to fear they might be. The new starting rate for savings protects the position of individuals and does not deny anyone a 10 per cent. rate of income tax. In other words, nothing is broadly changing the arrangements that are already in place. He asked about the position of trustees and whether the starting rate for savings was not available for trusts. The starting rate for savings is for individuals. Trustees are not individuals, so the rate for trusts are unchanged, and that is covered by section 11 of the Income Tax Act. He asked me about the rate for trustees, and I can confirm that 20 per cent. is the rate.
Amendment No. 12 would include an additional provision for the starting rate for savings.

Philip Hammond: I am not sure that I have understood what the Minister said. Was she confirming that the 20 per cent. savings rate is available to trustees, but that the 10 per cent. starting rate for savings will not be available to trustees? If that is the case, can she explain to the Committee why the treatment of trustees has changed?

Jane Kennedy: I am not aware that there is a change in the treatment of trustees. We are talking about the savings rate as it applies to individual taxpayers, as opposed to trustees. That is the advice, as I have it, and I will want to test that against the hon. Gentleman’s further challenge to it. That is certainly my understanding of the position.
On amendment No. 12, I hear what the hon. Gentleman says about the complexity and about the need for an individual to make a formal claim. The amendment seeks to include the additional provision from the starting rate for savings, so that it would be applied only where such a formal claim is made. Individuals are not required to claim a rate of tax. The phrase “formal claim” has a particular meaning. The rates of tax that apply are statutory and mandatory. However, the starting rate of savings only applies to a relatively small number of individuals whose non-savings income does not exceed their personal allowances, plus £2,320. Given that relatively unusual combination of different incomes, it is not possible for Her Majesty’s Revenue and Customs to put in place a way of deducting 10 per cent. income at source from savings income that is liable at that rate.

Stewart Hosie: I appreciate the complexity of the issues that the Minister is describing, but I am at a loss on dividend income, which is taxed at 10 per cent. up to the basic rate and at 32.5 per cent. thereafter. There is no abolition of the 10p rate if the dividend income exceeds the basic rate at which it would apply, which is the case with savings income. I am not sure why that can be achieved with dividends, but not with non-dividend savings income.

Jane Kennedy: Dividends are subject to tax at both the corporate and shareholder level, but the shareholder is provided with a 10 per cent. non-payable tax credit to reduce the second layer of tax in recognition of the tax already paid at the corporate level. So dividend income is treated differently. The initial corporate tax is therefore partly mitigated by the tax credit. Individuals are entitled to the 10p rate on all or some of their savings income and will receive it when they complete a self-assessment tax return or if they claim a repayment on an informal claim form.

Peter Bone: Is not the problem that most people in such a situation will not fill in self-assessment tax returns, which are extremely complicated? Most people will not bother.

Jane Kennedy: I am not advised that that would apply to most people, and I want to answer some of the specific questions on this point. Those eligible for the 10 per cent. rate claim back their money from HMRC using R40 forms, which, along with a comprehensive guide, are published on the HMRC website, but they are also available through the Directgov website. HMRC has promoted, and will continue to promote, the ability to claim through communications with taxpayers, advertising and its website. As I have said, it has recently provided further guidance on the new savings starting rate on its website, and it publishes a detailed leaflet available to banks and building societies to give to their customers. The hon. Member for Runnymede and Weybridge would probably reply, “That is fine, as long as the guidance is clear.”

Philip Hammond: The Committee will understand my concern. It is great to put guidance on websites, but some of the people about whom we are talking might not pursue such matters vigorously. For example, older people who might be unfamiliar with the world of Government websites—a fascinating subject in itself—might not pursue them. However, I should like to respond to the Minister on a specific point: a few moments ago, she said that HMRC cannot give that relief at source for a variety of reasons. However, I understand that, under the R85 procedure, it is possible for some classes of individual to have that rate applied to them at source. For the Committee’s benefit, will she clarify what R85 is and how it works?

Jane Kennedy: A very small number of people qualify for the rebate—if we want to call it that. They will be those whose incomes fall below the threshold and whose savings income, therefore, will be taken into account. A few people will have a very small savings income representing their entire income. The main way in which the claim is made is through the R40 form. I shall want to review the availability of the advice and consider whether HMRC can do more to promote the take-up of the benefit through banks and building societies, which pay interest to individuals subject to the tax. The R85 form is for non-taxpayers. If the hon. Gentleman wants further detailed information on how that works, I can provide it to him, and I would supply a copy to the Committee.

Philip Hammond: I understand why the Government are reluctant to go down that route, but it strikes me that there are two ways of doing it—either give the relief automatically, then claim it back, or do not give the relief automatically.

Sitting suspended for Divisions in the House.

On resuming—

Jane Kennedy: I was finishing my response to the amendments and was particularly interested to know the thinking behind amendment No. 12 of the hon. Member for Runnymede and Weybridge. I have made note of some of his suggestions. I hope to answer a couple of questions to his assistance. He was probing around the issue of HMRC and asked why arrangements cannot be made for tax to be deducted at source. I said that that was because, generally, the payment of interest on savings is subject to tax for a small group of taxpayers. Bank and building societies deduct tax at 20 per cent. It is not possible for banks to predict a customer’s income and to deduct at 10 per cent. or, indeed, at 40 per cent., so the R85 form to which the hon. Gentleman referred is used by non-taxpayers to self-certify that they are non-taxpayers. In those circumstances, the bank does not deduct the tax at source.

Philip Hammond: I have just remembered what I was saying to the Minister in my intervention. The way in which to ensure that people receive the relief would not be to deduct 10 per cent. at source and then recover the additional amounts. We would not have the problem of potentially large numbers of people failing to claim the relief to which they were entitled. I am sure that the right hon. Lady can also imagine the cacophony of objection to such a suggestion from HMRC, but it is important that we recognise that we have two players of unequal strength: on the one hand, there is HMRC and, on the other hand, is the individual low-income taxpayer. Matters are so structured that the taxpayer must do all the running to get what he is entitled to, while it should be possible, at least in theory, to structure matters the other way round, so that HMRC had to do the running to recover the additional tax when it was due.

Jane Kennedy: How would the banks distinguish whose savings income was to be taxed at 10 per cent. or otherwise? We would get into the situation where the banks could not distinguish between those who owed more tax because their thresholds did not apply and were not part of the small group that was entitled to a rebate. We would have just as difficult a relationship between HMRC and the taxpayer, as HMRC sought to recover the tax that it was owed.

Philip Hammond: I do not seek to play down the difficulties, but it could be possible to have a self-certification regime along the lines of that outlined by the right hon. Lady for non-taxpayers. Presumably, someone who self-certifies as a non-taxpayer will be subject to HMRC compliance checks and will be required to pay tax retrospectively if it turns out that they were, in fact, liable to pay tax on the amount. It is a theoretical possibility. I am seeking to help her, because I assume that she shares our objective of ensuring maximum take-up of the relief by those who are entitled to it. That is perhaps a thought to throw into the pot.

Jane Kennedy: I agree with the hon. Gentleman that we share the same objective, although there is a problem with tackling the issue along the lines that he suggested. Although it is theoretically possible, it would draw more people into having to make a self-assessment return than applies at the moment. Furthermore, it is not advisable for a bank or building society to accept a taxpayer’s self-certification that they are in a particular band. That would put a greater administrative burden on banks and building societies. Would they be responsible for determining whether the individual had provided a correct self-certified assessment? Where does the responsibility lie? I believe that banks and building societies would be somewhat nervous of that approach. As he suggests, it is theoretically possible. However, it is probably better to encourage HMRC to advertise to people who are in receipt of savings income that such relief is available and seek the good offices of banks and building societies to do that.
Amendment No. 12 seems to make no change to the long-established position, other than to put the requirement for a formal claim on the statute book. I therefore fail to see any benefit in either of the amendments that the hon. Gentleman has proposed. I hope that they were proposed as probing amendments to get on the record some of the Government’s thinking and how HMRC is dealing with the issues that he rightly raises.
I hope that members of the Committee will recognise that the 10p rate is a valuable aid to saving for those on low incomes. I assure hon. Members that the rules have not changed. Individuals who had savings income taxable at the 10p starting rate in 2007-08 are likely to have savings income taxable at the same rate in the next year.

Philip Hammond: If I understand the Minister correctly, she is saying that those who had income taxable at the starting rate in 2007-08 are likely to have income taxable at the starting rate for savings in 2008-09. That is not my understanding, for the very reason that the hon. Member for Dundee, East has set out in the debate. The starting rate for savings is applicable only to the first £2,350 of savings income, where the individual does not have other earnings up to the personal allowance limit. Many people who would have benefited from the 10p income tax rate and who have savings income will not benefit from the starting rate for savings because the savings income will be taken as the top tranche of income. I think that that is correct. The Financial Secretary will correct me if I am wrong.

Jane Kennedy: Notwithstanding the intervention that the hon. Member for Dundee, East made earlier, the description that the hon. Member for Runnymede and Weybridge has just given is not how I understand the position. I will double check that because I understand that the rules have not changed. Individuals who had savings income taxable at the 10 per cent. starting rate for 2007-08 are likely to have savings income taxable at the 10 per cent. starting rate in 2008-09.

Stewart Hosie: That is true only in circumstances where they do not earn any money that would accrue normal taxation. As soon as they breach the threshold, the 10p rate goes, even up to £2,320, and they pay at the higher rate thereafter. For the record, that is in table A3 of the Red Book.

Jane Kennedy: I believe that the hon. Gentleman is right. We are not in contradiction. Having had a useful debate about this group of proposals, I hope that the hon. Member for Runnymede and Weybridge will withdraw the amendment.

Philip Hammond: The Minister is correct that the amendments were tabled as probing amendments. I said explicitly that amendment No. 12 was tabled with a view to seeking clarification from the Government. I should like to place on the record that any suggestion that the introduction, by way of amendment, of an explicit requirement to make a claim was not intended to change the current situation, but merely to make explicit the current situation and to probe the Minister on the consequences.
On that last point, I think I am right in saying that we do not disagree, but the Minister was in danger at one point of inadvertently misrepresenting the situation. Somebody who earned £12,235 last year, of which £10,000 was earned and £2,235 was savings income, would have paid 10 per cent. on part of their income. That person—again earning £10,000 and having £2,235 of savings income—will not, as I understand it, pay 10 per cent. on any of their income this year. So that it is a significant change.
I did not quite hear the Minister clarify two points in her response. I asked her what the Treasury’s estimate of the uptake of the relief is. This goes to the central point that we have been discussing: what percentage of people entitled to the relief does the Treasury expect to claim and has it used as the basis of its modelling of the likely cost of the measure? The Minister did not answer that question. Although I accept the difficulties of devising a system that gives the relief automatically, in the absence of an indication of what the expected uptake is, it is very difficult to see whether this is a real, big problem or just a real, small problem. It would have been helpful if the Minister had given us some figures for the Treasury’s uptake.
I am also still entirely missing clarification on whether any other form of savings income, other than dividend income, will not be subject to the starting rate for the savings taxation regime. The Minister was slightly ambiguous in her answer. She made clear that dividend income was such a form of income. However, the Committee would find it interesting and useful to know what other form of savings income, if there is any, will not be subject to the starting rate for savings. I do not know whether the Minister wishes to intervene or whether she may seek to catch your eye again, Mr. Cook.

Jane Kennedy: The hon. Gentleman gives me the opportunity to say that I would be happy to provide the information, and I will do so in writing if he agrees. As some detail is involved, I think that he would find it helpful if I sent it in writing.

Philip Hammond: I am grateful to the Minister for that, and given that these are probing amendments, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 1 agreed to.

Clause 4

Charge and main rates for financial year 2009

Mark Hoban: I beg to move amendment No. 2, in page 2, line 30, leave out ‘28%’ and insert ‘25%’.
It is not often that tax hits the headlines and front pages of the newspapers, but to have two tax issues on the go at the same time demonstrates the scale of the concern. One area of concern has been about the 10p rate, which we discussed last week. In this case, the rate of corporation tax and the decision of UBM and Shire to switch their tax domicile from the UK to Ireland has propelled corporation tax to the front of the news agenda.
The immediate cause of the departure for both companies was the consultation on the tax of foreign profits. Both UBM and Shire have significant non-UK interests, and they were concerned about the direction that the consultation is taking; but that overlooks the fact that there are many companies now which have trodden the same path—not necessarily for the same country of domicile, but they have certainly chosen to leave the UK for tax purposes.
COLT communications moved its domicile to Luxembourg. Kraft, Google, Experian and Yahoo have all moved outside the UK. In some cases, that was part of other transactions, but part of the reason involved the competitiveness of the UK tax regime. In the financial services sector, Omega, Hiscox and Catlin moved their tax domiciles to Bermuda, because of its significantly lower tax rates and regulatory burdens on insurance businesses.
One of the crucial factors driving the debate about those companies and others looking to move offshore is the headline corporation tax rate, which has become increasingly uncompetitive. In 1997, the UK had the fourth lowest rate in the EU; now we have the 19th. That is starting to bite, and people are starting to think about it. A report by the City of London corporation entitled, “The impact of taxation on financial services business location decisions” highlights the deterioration of our competitiveness. The summary says:
“Until fairly recently the UK had what was felt to be a very attractive tax regime as regards both corporate and personal tax rates, but this has changed.”
Some 80 per cent. of respondents to the survey felt that the competitiveness of the UK regime had deteriorated in the past few years. It is not just about the rates of tax that companies pay. The report says:
“Critical other factors are Certainty of Interpretation and Predictability, and Attitude and Approach of the tax authorities.”
The UK had the worst scores among respondents on those factors.
A complex series of issues affect the reason why companies seek to move from the UK into other jurisdictions. When asked about the uncertainty of the tax system, survey respondents referred to the unpredictability of policy. Policy changes are introduced suddenly, taxpayers and their advisers have no sight of them and consultation does not take place. We saw that with the changes to capital gains tax announced in the pre-Budget report last October. Concerns were expressed about the difficulty of obtaining a definitive position from HMRC on particular tax planning issues. Again, that concern has undermined the UK’s attractiveness.
HMRC’s increasingly aggressive approach to closing the tax gap has led to uncertainty about tax rules. Some rules have been changed, which has had a negative impact on businesses. A helpful article appeared in The Tax Journal last week entitled “Shire plc: will the last one to leave please turn off the lights?” The author commented on the approach by the Government and HMRC to tax issues:
“The Government’s crusade against what it calls unacceptable tax avoidance has moved into many areas that used to be considered by HMRC as well as taxpayers to be perfectly acceptable tax planning”.
The article goes on to give some examples, but I shall not detain the Committee with them. It highlights the fact that practice has changed. It says:
“This type of tax planning was common within UK groups and was what enabled such groups to compete in the global market.”
People have noticed a more aggressive approach to what were hitherto commonly accepted tax planning schemes. That brings in more revenue for HMRC, but it caused the effective tax rate for those businesses to increase, because it was not offset by a reduction in the headline rate of corporation tax until last year’s Budget. Although we are not in the business of condoning aggressive tax planning, the clear lesson is that closing down those practices has led to increased tax bills without any compensatory decrease in the headline rate. It has made Britain’s tax regime uncompetitive and it has put the economy at risk.
What are the consequences of the deterioration in the competitive position of the headline rate of tax and the general changes in the tax system? It is certainly clear that tax has become an increasingly important factor in determining where firms locate their business. The City of London survey showed a consensus that there has been a seepage of jobs and business from London, and it highlighted the fact that competing financial centres such as Dublin, Switzerland and the Netherlands offer more attractive tax regimes than London. The tax and other advantages that Dublin offers mean, according to the survey, that about 25,000 jobs are in Dublin that could and should be in London. In the interests of balance, the survey also says that New York is seen as an uncompetitive centre with high taxes, a particularly aggressive tax authority and a fragmented, difficult regulatory structure. We would be in much greater trouble if the US sorted out that regime, which would provide a further incentive for businesses to relocate from London to other centres.
The report focuses on the financial services sector, which is very mobile. People in the sector have made comments in recent months about the ease of locating some of their business outside London. Hedge funds are moving to Switzerland and private equity companies are moving out of the UK. However, the problem is not specific to the financial services sector. Shire is a pharmaceutical company and United Business Media operates in the media sector and has relatively few UK-based assets. Both Google and Yahoo are high-tech internet companies, and Kraft is a food company. The concern about the deteriorating competitive position of the UK system is clearly felt across a wide range of sectors, not simply in the financial services sector.
With that in mind, it was interesting to see a quotation in the Financial Times last week from GlaxoSmithKline, the big pharmaceutical company—we are fortunate to have such companies based in the UK—in which the company said:
“We have no plans at present to relocate our headquarters for tax reasons...However, we believe that the UK business environment has to be realistic so it doesn’t impair our ability to compete globally, and it is important that the government ensures that the UK is an attractive location for companies who have headquarters here.”
Again, that is a clear signal that multinational businesses, working in a flexible global climate, are keeping an eye on all the factors that determine whether or not the UK has a relative competitive advantage over other locations in tax and so on.
Having identified the issue, what is the correct response? Amendment No. 2 proposes that we focus on the rate of corporation tax. The Government are mindful of the importance of the matter, and last week, the Chancellor issued a press release stating that a working party would be set up to consider some of these issues. It was surprising that there was so little detail in that press release. The working party’s members had yet to be identified and its terms of reference were in draft rather than finalised. I suspect that the Government were responding to the news about UBM and Shire, and were trying to demonstrate that they were doing something about it. At the Institute of Directors conference last week, the Prime Minister hinted that corporation tax rates could be cut. We always welcome imitation as a sincere form of flattery on tax matters. There is a long list of tax policies that the Government have tried to copy in recent months, and I shall not detain the Committee by naming them.

Stephen Hesford: Will the hon. Gentleman give way?

Mark Hoban: Perhaps the hon. Gentleman will tempt me to run down that list.

Stephen Hesford: There is an even longer list of occasions on which the Tories got it wrong on tax year after year in the previous 10 years, whereas we got it right. Perhaps the hon. Gentleman will take that into account.

Mark Hoban: I have to commend the hon. Gentleman: he is a trier on these issues, and always seeks to redress the balance.

Philip Hammond: He will get his reward one day.

Mark Hoban: Time is running out for him to get that reward, but I am sure that the Government Whip will take notice of his sterling service in defence of the Government’s track record.
The Prime Minister has followed the lead that we set. Earlier this year, my hon. Friend the Member for Tatton (Mr. Osborne) said that we supported a cut in the rate of corporation tax to 25 per cent., as suggested in amendment No. 2. To reassure Labour Members and the Financial Secretary, this tax cut has been funded. We have identified the fact that we could make further reductions in the rate of capital allowances to fund the reduction from 28p to 25p, so it would not cause a fundamental change in the overall fiscal position. Given that the Prime Minister has signalled his intention to follow our approach, Labour Back Benchers might wish to embrace that signal and support us. If they back the measure there will not be any calls from the Prime Minister asking them to change their minds, whether he is in the west wing or not.
As I said, this is not an unfunded tax cut, and we would finance the reductions in the headline rate by reducing the rate of capital allowances. As my hon. Friend the Member for Runnymede and Weybridge said, by virtue of the conventions that govern these Bills we cannot table the opposite and equal tax increases, but hon. Members should be aware that that is our position. Our position is well expressed in the following quote:
“Promote investment and growth by reducing tax-driven distortions on commercial activity, ensuring that business decisions are based on commercial rather than tax considerations; stimulating higher levels of foreign and domestic investment through a lower CT rate on a broader tax base”.
That encapsulates our policy admirably. In case any Labour Members query it and do not think that they can support that line of attack, may I point out that that quote was taken from “Business tax reform: couple allowance changes technical note” (2007), produced by the Treasury. Clearly, the Treasury has cottoned on quite quickly to the idea of reducing capital allowances and the distortion that takes place as a result of the Government giving tax relief to particular types of activity, and using that to reduce the headline rates of corporation tax. That is the right policy to tackle, as one of a series of steps, the lack of competitiveness in the UK tax system.
If we do not act, there is a risk that Britain’s tax base will shrink. Not only will UK-domiciled companies seek to relocate for tax purposes overseas, companies seeking locations in which to invest will look at the UK and see a high rate of corporation tax that is out of step with our European competitors, and thus seek to locate in those countries, rather than in the UK. The impression that the impact is double-edged—companies are driven out of the UK if our system is uncompetitive in relation to other jurisdictions, and people are discouraged from moving to this country—was borne out in the City of London survey, in which respondents thought that, based on current trends, the seepage of jobs out of London would continue and accelerate. The report highlighted academic research that said that low-tax regimes successfully attract inward investment over time—the opposite is true of high-tax regimes. The amendment recognises the truth of that statement, and it is in the country’s best interest to reduce the headline rate in the way that we have outlined. Given the state of public finances, the only proven way to do so is to reform capital allowances, too.

Jeremy Browne: When considering the merits or otherwise of the amendment, we have to remember that the Conservative party is committed to the same overall levels of spending and taxation as the Labour Government. There is nothing in the Conservatives’ proposals that represents a net tax cut—every single proposal that they have introduced has to be paid for somewhere else in the system. The hon. Member for Fareham was commendably honest when he admitted that the beneficiaries of the tax cut would be asked to fund it themselves, so it was not as attractive a proposition for business as it might appear to someone who was casually reading the amendments.
In fact, I can almost imagine the meeting that took place. The Conservative party, to try to reassure business that, despite their reputation for high taxes, they were still on the side of business, went along to the meeting and said, “Don’t worry: we’ve tabled an amendment in the Finance Bill Committee that says that we are going to cut the rate of corporation tax by 3p”. The business audience says, “Wow, that’s very impressive. It’s exactly the sort of policy that we hope the Conservative party would put forward on our behalf”. However, the meeting was brought to hasty conclusion before it was explained to the business audience that they would be paying for the 3p cut through the allowances that they would lose elsewhere in the system. I shall return to the motivation of the Conservative party.
The Liberal Democrats support help for business through cuts in corporation tax, but we have made it absolutely explicit that that would have to be funded through removals of research and development reliefs and other business allowances. As a party, we are not instinctively hostile to the Conservative’s proposal, but we should be honest and straightforward with the business community and not dress up such a proposal as a tax cut—it is not a tax cut—which is what the Conservative party are doing. In the Daily Mail in December, Ireland’s decision to cut corporation tax to 12.5 per cent. was described by the shadow Chancellor, the hon. Member for Tatton (Mr. Osborne), as being exactly the sort of policy that the British Government ought to follow, but he has not identified how we will get to anything like that position. The shadow Chancellor has said on other occasions, including on “The Andrew Marr Show” in March this year, that there was “no scope” for cuts in business taxes because of the UK’s budget deficit.

Stewart Hosie: I must have misheard the hon. Gentleman. Did he say that he would pay for corporation tax cuts by cutting R and D tax credits? Surely he meant to say capital allowances. Is he really going further to denude UK business, which already spends only a tiny proportion of GDP on R and D? Will he clarify that?

Jeremy Browne: What the hon. Gentleman mentioned is part of the package in which we are interested. There are some subsidies for research and development, and we think that it is suitable that the private companies that benefit from them should pay for them, as opposed to the taxpayer. However, there are other matters on which R and D needs to be stimulated through taxpayer subsidy. The overall point is that the system should be simplified and the headline rate reduced, and that that should be funded through the removal of a complicated system of reliefs. Does that mean that we are sympathetic to what the Conservative party aspires to do? Yes it does, but we are not trying to dress it up as a tax cut, or persuade business audiences that that is what it is. We are leaving that to the Conservative party.

Mark Field: I am reluctant to stop the hon. Gentleman while he is in full flow, but would it be fair to summarise his policy as having his cake and eating it while sitting on the fence?

Jeremy Browne: No, it would not be fair to summarise it that way at all. I am concerned that the Conservative party is not being straight with businesses.—[ Interruption. ] The Conservatives think that they need only to mention Ireland to make themselves a business-friendly party. They need to say to business: “We are committed to the same levels of taxation as the Labour party and a much bigger state in terms of public spending than was the case when the Conservatives were last in Government, and we are not in favour of reducing the overall tax burden on business. When we mention the magic word, ‘Ireland’, we’re afraid, dear businessman or woman, we are being wholly misleading on the policies that the Conservative party wish to put forward at the next general election”.

Mark Hoban: Will the hon. Gentleman clarify his objection to the policy? He said two contradictory things. First, he said that the hypothetical meeting would be cut short before we got to the bit about capital allowances, and that we were therefore trying to hide that part of our tax policy. Secondly, he cited my hon. Friend the Member for Tatton, who made it explicit on “The Andrew Marr Show” that because of the state of the Government finances, there could be no overall reduction of the tax burden. We are both open and closed, according to his analysis. Which does he really believe?

Jeremy Browne: Let me answer that by giving the hon. Gentleman another opportunity to intervene. Does he favour Britain’s total tax liability on businesses being the same as it is under the Labour Government, or lower? If he wishes to give way, I am happy for him to do so.

Mark Hoban: I think the hon. Gentleman is giving way and I am intervening, to get the process right. We have made it very clear that we cannot at this point reduce the burden of taxation, because of the poor shape in which the Government have left the public finances. There is no great mystery about this. It is surprising that the hon. Member for Taunton is the only person in the Liberal party who is trying to outflank us on the right. He will find he has a very short career if he is not careful.

Jeremy Browne: Hey presto, we have the answer, which is that the Conservative Opposition criticise the Government for having an unfriendly business tax environment but are committed to exactly the same level of business taxation as the Labour Government they criticise. Every single time we hear the shadow Chancellor, or a Conservative spokesperson, in front of a Conservative audience or on television citing Ireland or whatever other country as an example to us all of the sort of policies we should pursue, we can look back at the intervention from the hon. Member for Fareham and know that the Conservative party is committed to exactly the same level of business taxation as the Labour Government.

Brooks Newmark: I am sure that the hon. Gentleman and his colleague, the hon. Member for Twickenham (Dr. Cable), have thought through the issue with respect to tax credits. When our competitiveness is compared with other countries, we do not fare particularly well as a percentage of GDP. I would therefore like to ask him: which specific research and development tax credits are concerned? Where is the fat in the system today and which policy would he change? What are his targets?

Jeremy Browne: We are discussing a Conservative amendment, too, so I am not going to go into a detailed discussion about that. I have made it quite clear that my party and I are sympathetic to proposals to simplify the system and reduce the array of relief and credits so that the headline rate can be decreased. We are sympathetic to what the hon. Gentleman’s party is putting forward, and we could have an interesting discussion. However, I am trying to draw to the attention of his Front Bench team, to him as Whip, to his party and, indeed to the Committee as a whole, the fact that the purpose of the Conservative party in tabling the amendment was to paint themselves as being more instinctively pro-business that the Labour Government. What we have just found out, interestingly, is that the Conservative party is committed to exactly the same level of overall taxation on British business as the Labour party.

Jane Kennedy: We can have a political knockabout and have fun at one another’s expense, but I think that the amendments tabled by the official Opposition have drawn attention to what we acknowledge as a problem and part of the global changes that are affecting the decisions on investment and where to locate that global multinational companies are making. Does the hon. Gentleman have no sensible proposals to make, other than the rather sweeping dismissal of the amendment and the Government’s policies?

Jeremy Browne: I was not trying to be either dismissive or particularly party political. I was trying only to shine a light on the policy that was being put forward by the Conservative party. I have already spoken about simplifying the tax regime that faces business. Simplifying the tax regime full stop is beneficial for businesses and for individuals, and one of the criticisms that I and many others would make of the Government is that the British tax system is far too complicated and hard to decipher, and that that deters some businesses from locating here. Quite aside from the overall level of taxation, it is the complexity that they face.
We operate in a wider global environment. People cite Ireland because of our cultural links and geographic proximity, and it is interesting for those reasons. However, I think that it is unreasonable to cite Ireland and imply that the tax regime policy in Ireland is being pursued by a British political party, without telling people that that political party has no intention of reducing the overall level of tax faced by business.

Siôn Simon: Although the hon. Gentleman keeps telling us that he will simplify the research and development tax credits, is it not the case that the hon. Member for Twickenham has had for several years a big bee in his bonnet about R and D tax credits, which he thinks do not work or are uneconomic? The issue is not about simplifying them but about getting rid of them, because the hon. Gentleman has a really big, buzzing bee in his bonnet about them. The hon. Member for Taunton does not know what is going to happen with them. All he knows is that the hon. Member for Twickenham does not like them and would not have them.

Jeremy Browne: That was a fascinating analysis of the different strands of opinion within the Liberal Democrats. The policy to which we in my party are all committed is ensuring that public money is spent as efficiently as possible and is as supportive as possible of British industry. We are trying to raise the necessary money to fund public services and to support a healthy business environment, and my hon. Friend the Member for Twickenham and I are both enthusiastic about that approach.
I wanted to establish two points: first, that the Conservative party favours as high a level of business taxes as the Labour party, which we have established; and secondly—
Mr. David Gauke (South-West Hertfordshire) (Con) rose—

Jeremy Browne: Is the hon. Gentleman going to disagree with the hon. Member for Fareham?

David Gauke: Of course not. The hon. Gentleman has mentioned that point several times. Would the Liberal Democrats reduce the burden of taxation on business? Is that a commitment?

Jeremy Browne: I am grateful for the opportunity to explain our policies to a wider audience, although, I fear, it is a rather partisan and uneasily persuaded one. My party is not committed to raising the overall burden of taxation. We think that taxes are high enough in Britain. However, we think that there is scope within the existing level of taxation to make taxes fairer and to place the burden better. I cited that point this morning. We could increase taxation on pollution—on activity that is damaging to the environment—and reduce taxation on people who are on low to middle earnings and who require greater assistance. I do not wish to test your patience, however, Mr. Cook. If, at the next general election, we are able to reduce the overall burden, our priority will be to help people who are on low earnings and at the bottom of the income tax threshold.

Frank Cook: Order. I have been very tolerant so far. I doubt whether anyone could have allowed the debate to range any wider than it has, so anyone who is hoping for a stand part debate on clause 4 will be somewhat disappointed. Can we redress the situation and focus our thoughts on amendment No. 2 please?

Jeremy Browne: Thank you, Mr. Cook. I shall not be led astray by any further interventions.
We have established that the Conservative party favours high business taxes, as does the Labour party. My other point, which is on the same theme of greater simplicity, is that business in Britain has not been done a favour by the chopping and changing of corporation tax rates over the years. As I understand it, corporation tax has changed seven times in the 11 years that the Labour party has been in government, and that makes it difficult for businesses to plan ahead.

Mark Hoban: Will the hon. Gentleman give way?

Jeremy Browne: I shall give way in a moment. Having said that I would not, my generosity has got the better of me. Before I give way, however, I shall leave people with this thought. The Institute for Fiscal Studies, in its green budget, says on that very subject:
“This does not seem a helpful contribution to the stable business environment that Gordon Brown has so often stated is vital for investment and economic growth.”
Of course, the Government must have the flexibility to make changes, but business likes to have the security of being able to plan in advance.

Mark Hoban: Just before the hon. Gentleman’s train of thought hits the buffers completely, is he saying that he is against reducing the rate of corporation tax, despite saying a couple of minutes ago that he was in favour of reducing it? He must clarify his thought process. Is he in favour of reducing it or not? If he is, how does he rebut the IFS argument that that creates instability in the tax system?

Jeremy Browne: I do not believe that those positions are contradictory. I keep explaining the same points, but I will explain them once more. My party is in favour of reducing the rate of corporation tax, funded by removing or reducing reliefs and allowances elsewhere so that there is greater simplicity, but that does not detract from the fact that businesses—and individuals—like to have some ability to plan their tax affairs in advance. Therefore, if there are more years when changes are made than years when changes are not made, that potentially builds uncertainty into the system for those who seek to plan ahead for their business taxation. Our view is that this would be the right way to go: if the Government were to make changes, but less frequently, in the direction we approved of, that would be beneficial to business.
In conclusion, the objective of reducing the overall level of corporation tax is laudable. Simplifying the system is laudable as well, but we must remember that we are all in this Committee debating the changes knowing that we favour an identical overall level of taxation on British businesses.

Mark Field: It is always a pleasure to follow the hon. Member for Taunton, eventually. I give my wholehearted support—perhaps not as wholehearted as that of the hon. Member for Taunton—to the comments of my hon. Friend the Member for Fareham.
I have sympathy at some level with the Government’s plight in relation to the overall rates. The Government obviously need to balance their books, with public debt spiralling out of control, and I understand that there is a reluctance to get into a downward auction of rates, whether on capital gains tax or in other areas. However, as my hon. Friend rightly pointed out, we live in a global market and all too often too many of the new business ideas—he referred to Yahoo and others—are very mobile. I discovered only today, chatting with a friend who is a senior executive of an outfit called Betfair in the gaming industry, that it has also left these shores, moving part of its operation to Malta. That is down in part to rates, but also to regulations, a point which my hon. Friend addressed.
As my hon. Friend rightly pointed out, the biggest damage is in relation to the uncertainty that has become part and parcel of the tax regime. It is greatly to the Government’s credit that for their first nine or 10 years they were able to maintain—during what was clement global economic weather—a sense of a strong economy going forward. They inherited a strong economy. Although many in business, many of whom I represent in central London, feared the worst, the ship sailed fairly smoothly on. Many of us feel that the biggest problem caused by some of the botched changes that have taken place, particularly over the past nine months, is that there is now a level of uncertainty in the system which is doing great damage to Britain’s global competitiveness in the business sphere.
There has been little proper consultation on a number of the changes in the capital gains tax regime, on issues regarding non-domiciles, and the like. Importantly, there should have been prior sight of many of those changes. There is, therefore, an inherent difficulty in getting a definitive position in relation to a range of taxation measures—capital gains tax and beyond. As my hon. Friend rightly pointed out, there has been a sense of an increasingly aggressive approach by Her Majesty’s Revenue and Customs, partly I fear, going back to my initial point, because of public finances that are spiralling out of control. There needs to be a much clearer approach to ensure that there is guidance from the authorities and professional advisers of corporations in advance, so that corporations can properly plan their tax affairs.
I fear that the biggest problem is that uncertainty, and for that reason we tabled the amendment. The amendment is not just about rates, but about some of the longer-term damage that has been done to Britain’s role and competitiveness. One can look at a range of league tables, the figures in which can in many ways spiral, but we have also had an incredibly solid economy in many ways, which has been dealt with fairly solidly. We all had disagreements about particular elements of the tax regime over the first 10 years of the Government’s administration. Over the past nine months, however, we have seen some real problems that will do lasting damage to our external investors, particularly in the globalised economic world in which we live. The one thing that we can be certain about is that international competitiveness will become ever more important in the years and decades to come. I fear that the biggest and most damaging legacy that this Government will pass on will be uncertainty surrounding our economic welfare.

Jane Kennedy: I am grateful to the hon. Member for Fareham for tabling the amendment, although we might have had the debate on the clause anyway. As he says with some justice, the weight of corporation tax is one of the factors that is quoted by some of our major companies when they make investment decisions. It was cited in the case of Shire and United Business Media, when they announced that they intended to insert a Jersey-incorporated Irish tax resident company as the top holding company for their groups.
May I answer some of the points made by the hon. Member for Fareham in his opening speech? Both of the companies to which he referred have stated publicly that they do not expect the move to have any impact on the level of activity and jobs, which will remain in the UK. Therefore, both will continue to be liable for UK corporation tax, as they are now, on the economic activity that they have located here. However, inserting a non-UK tax resident holding company on top of a multinational group provides an opportunity for the group to escape the application of the current rules on the taxation of the foreign profits of the group’s overseas subsidiaries. A review of the reform of those rules is under way and has been discussed, in detail, with business. The hon. Member for Fareham and I would share the goal of maintaining the most competitive corporation tax rate of the major economies. The Prime Minister’s speech to the Institute of Directors last week reiterated that when he stated:
“Our aim is to reduce corporation tax even further when we can afford to do so...and we’re looking at how we’re going to do it.”
We have continued our engagement with business over recent months on the shape of proposals for the reform of taxation of foreign profits. We are committed to issuing a consultation document on the proposals in the summer, and we remain committed to engaging and consulting fully with business on those proposals both prior to and after publication. As part of that commitment, the Chancellor announced the formation of a working group of industry representatives to discuss with Ministers ways in which the tax system can provide the long-term certainty that multinational companies need considering the competitiveness and other challenges facing both business and Government. As businesses have become more global in their reach, we are keen to work with them to understand how the UK’s tax system can reflect the challenges of globalisation. Businesses have asked us to respond to global challenges, but they have also made it clear that they value stability and certainty.
Throughout my period in office as Financial Secretary, it has become clear, as the hon. Member for Cities of London and Westminster rightly said, that certainty and the ability to make planning decisions knowing what the tax implications will be are highly prized by business. Striking a balance between the objectives of responding to global changes and providing certainty is not always easy. We recognise that sometimes the Government may have reacted too quickly in responding to the need for change. Sometimes, we may not have reacted quickly enough to keep pace with globalisation. At the same time, other countries are also changing their own regimes, which also affects the perception of UK competitiveness. Ireland has been quoted a number of times as having a very low rate of corporation tax in comparison with ours and therefore is seen as a highly attractive place. However, I believe that The Observer had an article this weekend in which it described the downturn affecting the Irish economy, which is causing employment in Ireland to reduce, the availability of jobs to reduce and the attractiveness of working in Ireland to reduce in comparison with the United Kingdom, which would indicate a different trend. Therefore, there is no developed economy in the world that is not affected by the global changes that we are dealing with.

Colin Breed: Does the Minister agree that global competitiveness and global corporation tax comparability are less to do with headline rates and more to do with what the companies actually pay?

Jane Kennedy: There is some truth in what the hon. Gentleman says. However, the headline rate is important, which is why we have been taking steps to reduce the headline rate of corporate tax and why we will continue to look for ways to maintain the competitiveness of the UK economy.
The working group that will be set up will be an important forum in the debate; we have responded to the requests of business in setting it up. We have also responded to requests to avoid rushing change without full debate and consideration of the issues. The group will be put together from representatives of broader business and it will form an additional element of our continuing dialogue with business, enabling me and other Ministers to exchange views with those representatives in an informal setting. It will not displace existing engagement with business.

Stephen Pound: When my right hon. Friend the Minister is exchanging views with business representatives, would she perhaps consider that perhaps the easiest, the most sensible and I shall say the most economically patriotic comment that could be made is that a pan-European fiscal harmonisation in the context of wider and deeper European integration would surely be the answer?

Jane Kennedy: I am not sure that that is the answer; it would depend in which direction it was harmonised in. It is not a proposal that I intend to explore at this point.
I thought that it would be helpful if I described to the Committee the steps that we are taking to consider whether the rate of corporation tax is at the right level and why we continue to keep these matters under review, as we do with all rates of tax.
Amendment No. 2 sets out to reduce the main rate of corporation tax to 25 per cent. for the financial year 2009. As I have said, the Government remain determined to maintain the best possible environment for business in the UK and with unprecedented economic stability in the UK, businesses have been able over the past decade to plan and invest more effectively for the long term. That has brought us a lot of benefit, as today’s high rates of employment underline. Companies have also benefited from a competitive tax regime.
To maintain that position last year’s Budget saw the announcement of a further reduction in the main rate of corporation tax to 28 per cent. That rate was legislated for in the Finance Act 2007 and came into effect from 1 April this year. With that step, the Government have maintained the UK’s position as having the lowest corporate tax rate in the G7. The rate cut was accompanied by a series of reforms to wider business taxation, which will be discussed in later debates in this Committee. As a package, these reforms constitute the most extensive set of reforms to the business tax system since the 1980s. The package modernises the outdated system of investment allowances for plant, machinery and buildings; I know that we will return to that subject later. It also gives further support to innovative businesses through the research and development tax credit.
It has been a pleasure to listen to the exchanges regarding the proposals put forward by the hon. Member for Taunton. This Committee is proving to be far more fun than I had anticipated it would be in studying the detail of the Bill—[Interruption.]So far.
More than £2.3 billion has been given in support of 30,000 claims for R and D tax credits since they were introduced for small and medium-sized enterprises in 2000 and for large companies in 2002. This Bill goes further. It includes clauses that increase the generosity of both credits, from 125 per cent. to 130 per cent. for large companies and from 150 per cent. to 175 per cent. for SMEs.
There is no questioning our commitment to R and D tax credits as an important and welcome support for businesses to invest and develop. Competitiveness is about more than just the headline rate of corporation tax. The UK tax system has other advantages, including a generous system with R and D tax credits, but also there is no withholding tax on dividends, which is regarded as very welcome. We have one of the largest networks of tax treaties in the world, and relatively low administrative burdens. We are unusual in offering full interest deductibility.
Looking at the tax paid by companies also indicates the UK’s continued competitiveness. As a share of gross domestic product, UK taxes on corporate income amounted to 3.4 per cent. of GDP in 2005, the latest year for which there are comparable figures. That was below the OECD average of 3.7 per cent., and in line with the EU15 average. The OECD ranked the UK among the most attractive places for foreign direct investment in the world. Indeed, there have been a number of recent examples of foreign investment with Toyota in Wales, and China Mobile locating to London this year. However, it is important to reiterate that we are not complacent.
On non-tax measures, the UK consistently performs well in comparison to other competitors. Perhaps I could turn to the amendment. The proposed reduction in the main rate of corporation tax to 25 per cent. from next year, would cost as much as £8.5 billion over the three years to 2011-12. That is probably around the global figure that we could agree between us. The hon. Member for Fareham says that this is not an unfunded tax cut, and that he would recoup all the tax through changes and reductions in capital allowances. The Opposition have proposed a package of corporation tax reforms, the key parts of which are, as I have said, the reduction of the main rate to 25 per cent., and a reversal in the rise of the small companies rate back to 20 per cent. That would be funded by reducing the main rate of plant and machinery capital allowances to 125 per cent., sorry, 12.5 per cent.—one would think I did not have my glasses on—reducing the long-life asset of integral features of expenditure rates to 6 per cent., and abolishing the annual investment allowance.
In putting the package together, I do not believe that the Opposition have made the right calculations based on the available figures. The whole package would be funded by changes to the capital allowances. I believe, and we have looked in some detail at the package, that that would penalise sectors investing in shorter-life assets, for example, technology. Capital-intensive sectors, such as transport and manufacturing would lose out, as would utilities, and I do not believe that the package would be sustainable in the long term. As I understand it, the Institute for Fiscal Studies acknowledged that the figures on which the package was based were drawn from figures available from 1971 to 1990—they do not reflect increased investment in computers or other short-lived assets, although they include long-life assets. The IFS acknowledged that rates of depreciation used in the accounts would have increased since that time.
While I am grateful to the hon. Gentleman for the opportunity to have a wider debate about the implications of corporation tax and its importance to business, we do not believe that the proposal in the amendment is sensible. Sticking with our proposals and the corporation tax that we have tabled is, as my hon. Friend the Member for Wirral, West acknowledges, part of our ongoing work to reduce corporation tax, so long as it is done in an affordable way and in consultation with the businesses that are affected. Therefore, I hope that he will not press his amendment to a vote. If he does, I hope that my hon. Friends will resist it.

Mark Hoban: We have had a useful debate on corporation tax. I agree with you, Mr. Cook, that it would be difficult to have a clause stand part debate, so I missed out on my clause 4 moment on this Finance Bill, but perhaps we might come back to that at another occasion.

Angela Eagle: That one has been done before.

Mark Hoban: Well, there is no point in having new jokes in the Finance Bill when we can just recycle jokes from previous years.
The speech made by the hon. Member for Taunton really betrayed to me his problem in setting out his tax plans. He spent time in the Committee of the whole House trying to establish the point about tax burdens and what we were in favour of with regard to whether it was higher or lower, but he managed to avoid any commitment himself until my hon. Friend the Member for South-West Hertfordshire rather pinned him down. He said, “I not committed to raise the burden of tax”, so it will not increase unless his hon. Friend the Member for Twickenham (Dr. Cable) changes his mind.
The hon. Member for Taunton was not entirely clear that he was going to lower the tax burden either, because he said that the measures outlined today in his speech would be funded by the abolition of the research and development tax credits and other reforms. This morning, he seemed to suggest that the 4 per cent. decrease in the starting rate for income tax would be funded through other tax increases, so unless he has something to wow us with later in our proceedings, the logic of his argument is that every tax cut that he proposes has to be funded by a tax increase elsewhere. Intellectually, that is a perfectly respected position, given the state of the Government’s finances and the way the economy has been handled, but he should be frank and transparent about the position that he reached, rather than forever trying to nibble away at other people’s views.

Jeremy Browne: I will be frank and clear. At the last general election, the Liberal Democrats proposed an increase in the tax burden over and above what the Government and the Conservative party proposed. That is not our position now. We do not wish to see the tax burden rise and think that it is high enough as it is. Unlike the Conservative party, however, we still hold to the possibility that we could fund cuts in the overall tax burden. I understand that the Conservative party is committed to an overall tax burden that is absolutely identical to that of the Labour Government. The hon. Member for Fareham is right that, when we propose that spending should be increased in one area or taxes reduced in another, we are seeking for that to be offset by changes elsewhere in the system, but we are not in favour of an overall rise.

Mark Hoban: I think that we are now clear on that, for the time being at least. With regard to the hon. Gentleman’s comment about instability in the tax system and the earlier comments from my hon. Friend the Member for Cities of London and Westminster, it is absolutely right that uncertainty is a factor in Britain’s deteriorating position when compared to our neighbours, particularly with regard to the competitiveness of our tax position.
The Financial Secretary talked about the need to consult on the taxation of foreign profits and mentioned that she would chair an informal group that included representatives of multinationals, but part of the problem is that business leaders will say, “We’ve heard all these pledges to consult before.” Look at what happened in the pre-Budget report in October. Totally unexpected and unplanned changes in capital gains tax came from a Government who were committed to consultation. Therefore, consultation on how the Government are managing corporation tax will not wash with the business community at the moment. We need a more certain and stable tax regime in which people understand the Government’s direction of travel on tax. I would not see any inconsistency in that if one were setting out a path that a Government might follow to reduce the rate of corporation tax. I do not believe that that would introduce unnecessary instability to the system—a point that the hon. Member for Taunton made. Certainty and predictability play a key part, and the erosion of that in the tax system has led to a deterioration in the competitiveness of our tax regime.

Stephen Pound: The hon. Gentleman is too tolerant; I am sure he will learn.
Before we move on from the delicious flights of fancy that are Liberal Democrat taxation policy, I would say that the hon. Member for Cities of London and Westminster referred to consumption on a fence. He should have added “dreaming of jam tomorrow”. The logic of what the hon. Member for Taunton said was that stability was so important that business would even resist a cut in corporation tax because of the terrifying destabilising effect. Will the hon. Member for Fareham say whether members of his party concur with that perspective from Taunton or whether they have a different view?

Mark Hoban: Moving an amendment that would reduce the rate of corporation tax suggests that we do not believe that business would be unhappy with that reduction. To be fair to the hon. Member for Taunton, I do not think that he quite meant to refer to reductions in the headline rate of corporation tax. As I was saying, the issue of uncertainty, complexity and predictability is quite important for businesses and we need to introduce reforms that help to deliver it in a more sustainable way that can be clearly understood by the business community.
On the issue of the rate, I think that the Government are at risk of being complacent, despite the protestations of the Financial Secretary. For too long, the Government have felt that people in the City have been crying wolf about this. The Government would rather dismiss the concerns as the view of a narrow group of people, but the scale of activity suggests that there is much broader concern than the Government have hitherto recognised. One can always tell how serious businesses are about a change when they spend real money on it.
Conversations that I have had with tax advisers over recent months have indicated that a substantial number of large businesses have commissioned serious pieces of work on how to move their tax residence from the UK to other territories. That is a serious issue , and we need to respond to it. It is in the interests of the economy as a whole that we get that response right. While I hear what the Financial Secretary is saying about the UK having the lowest rate in the G7, the position has deteriorated. We have moved from having the fourth lowest rate in Europe to the nineteenth lowest. That is an important fact that we need to bear in mind. This is not just about Ireland. There are other countries looking at the same route which offer attractions for businesses to relocate away from the UK.
The Financial Secretary said that UBM and Shire were not going to move employees out of the country, would not reduce their activities and would continue to pay UK corporation tax. That is their position at the moment, but who knows where they will go to? The other message is that this matter will affect businesses looking to invest in the UK. They look at the signal given by high corporation tax relative to our competitors and use it as a factor in their decision making, as the Financial Secretary recognised in her response. It is time for us to take action. The amendment sets out a very clear path for the way that the tax system should go and I will press it to a vote.

Question put, That the amendment be made:—

The Committee divided: Ayes 10, Noes 18.

Question accordingly negatived.

Clause 4 ordered to stand part of the Bill.

Frank Cook: May I ask the Committee to return bright-eyed and bushy-tailed on Thursday?
Further consideration adjourned.—[Mr. Blizzard.]

Adjourned accordingly at fourteen minutes to Seven o’clock till Thursday 8 May at Nine o’clock.